How to calculate the true cost of a short-term facility

Step 1 — total every charge

Add up all the costs of the facility: the factor or discount charge, the service or arrangement fee, and any admin cost. This is the total cost of credit for the period.

Step 2 — find the real usage period

Work out how long you actually hold the money — often weeks, not the nominal term. On invoice finance it is the time until the invoice pays; on a cash advance it is the repayment period.

Step 3 — annualise the cost

Scale the period cost up to a year to get the annualised cost. A 4% charge held for one month is roughly 48% annualised — the number that lets you compare with a loan APR.

Step 4 — compare with a term loan

Put the annualised cost next to a term-loan APR for the same purpose. The calculator below helps you check the figure.

Step 5 — decide on value, not just cost

If the short facility is dear but wins a return worth more, it can still be right — see is borrowing worth the interest.

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